Logistics

The Silk Railroad of China-Europe Trade

Multinationals operating in China have been setting up factories deep in the interior in search of affordable labor. The drawback: These plants can be more than a thousand kilometers (621 miles) from the coast. For companies exporting to Europe—still one of the largest markets for Chinese goods—shipping by air from Chongqing or other inland cities is too expensive. Trucking or carrying goods by train to the ports of Shanghai or Shenzhen’s Yantian and then shipping them to Western Europe can take 40 days.

For Hewlett-Packard (HPQ), which produces notebook computers in Chongqing, there’s an alternative: an international freight-train network linking China to Europe. Since 2011, HP has transported 4 million notebook computers along the 11,179-kilometer rail route, inaugurated last year by Chongqing and Chinese train officials. It starts in Chongqing and traverses Kazakhstan, Russia, Belarus, and Poland before reaching Duisburg, Germany. A separate line from China’s northeast links up with the Trans-Siberian Railway, which runs 9,288 km from Vladivostok to Moscow.

With plans to transport its inkjet printers by rail as well, HP says it will increase its rail use from an average of one train to 1.5 trains a week in 2013. “We were a pioneer in going to western China, and we are a pioneer in developing this route,” says Tony Prophet, senior vice president of operations for printing and personal systems at HP.

Shipping one container by train costs about $10,000, one-third the price of air transit, Prophet says. Although the train is about twice the cost of shipping by sea, it takes only 21 days for products from a factory in Chongqing to reach Western Europe by rail. The carbon footprint of rail, meanwhile, is about one-thirtieth that of air freight. Electronics companies including Foxconn and Acer, both with factories in Chongqing, are also shipping to Europe by rail, according to Vienna-based freight-forwarder Far East Land Bridge. Acer spokesman Henry Wang confirmed its use of the railroad; Foxconn declined to comment.

BMW (BMW:GR), Audi, and Volkswagen (VOW:GR) are using the rail link to ship auto parts produced in Germany east to their assembly plants in China. “Every empty run costs a lot of money, so you need a balance, east and west,” says Land Bridge Chief Executive Officer Thomas Kargl, adding that his firm is running trains for all of these companies. BMW alone sends three to seven trains a week from Leipzig to China, transporting car parts for its assembly plant in Shenyang.

Other industries tilting toward rail include steel, scrap metal, plastic, and chemicals, says Kargl. DHL and DB Schenker announced the launch of more frequent services last year. DHL has evolved from an overnight service to be a global player in logistics, including rail; it’s owned by Deutsche Post (DPW:GR). DB Schenker, another logistics provider, is owned by Deutsche Bahn, the German railroad company.

The Chinese are enthusiastic about the rail connections to Europe. The government is considering financing track construction in its Central Asian neighbors of Uzbekistan and Kyrgyzstan, reports the official Xinhua News Agency. Premier Wen Jiabao has referred to the China-Europe rail link as part of a new Silk Road, the land route that connected western China to the eastern Mediterranean for more than a millennium. The Russians like the arrangement, too: Russian Railways, the state railroad, is a shareholder in Far East Land Bridge. “Doing smooth business with the Russians is very important. They control the line,” says Kargl. “If you have their support, you can do it.”